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Monday, April 9, 2012

Can The Groupon Model Last?

The Groupon logo inside the online coupon company's offices in Chicago (AP)

The Groupon logo inside the online coupon company's offices in Chicago (AP)

Groupon, the online coupon giant, is one of the fastest growing companies in the world, but has been facing increasing doubt about its financial viability and long-term future. Since first going public in November, its stock has plummeted from $26 to $14.

The company recently hired Paul Taafe as its new public relations guru after several high profile missteps, including an accounting error that gave an overly optimistic picture of finances. Groupon recently issued a revision to its fourth quarter financial results, revealing that it had overstated its revenue by $14.3 million.

“If you’re a new public company, this is a big no-no,” said Douglas MacMillan, technology reporter for Bloomberg. “You want to be telling investors that you’re confident in your model, they’re doing the opposite.”

MacMillan told Here & Now‘s Robin Young that Groupon is basically sending investors a message that their internal financial controls are inefficient.

“If you’re a new public company, this is a big no-no. You want to be telling investors that you’re confident in your model, [Groupon is] doing the opposite.”.
– Douglas MacMillan, technology reporter for Bloomberg

The accounting error was discovered after the company realized that many customers had returned their coupons in January, according to The Wall Street Journal. MacMillan says Groupon started offering more luxury items and deals with higher price points in the past year, which resulted in a higher refund rate.

The company’s growing pains raise questions about how long the Groupon model can last. In addition to having to tackle hundreds of competitors including LivingSocial, Amazon Local, and Google Deals, the company is facing a shareholder lawsuit and a possible investigation by the Securities and Exchange Commission.

“His work’s cut out for him,” said MacMillan, referring to Taafe’s new role in managing public relations for Groupon.

Guest:

  • Douglas MacMillan, technology reporter for Bloomberg

Please follow our community rules when engaging in comment discussion on this site.
  • Chrisk

    In response to the Headline the answer is NO…. There is no long term sustainability for this model for many reasons. Firstly the obvious which we are seeing now the amount of refunds, you will see most of the restaurants have disappeared from this model because its simply doesn’t work for them financially. Another reason is you can’t continuously offer 50 to 90% discounts as everything becomes devalued or you have instances of inflated prices to allow for such a steep discount.

    The only way this model works is for the consumer to pay the merchant directly when they use the “coupon” and for the merchant to have control over their offers and have a monthly fee where they can truly track their ROI.

  • Eric

    Groupon spends more than it makes. It’s not a success.

    This sums it up: http://shortlogic.com/post/6142108636/groupon-ipo-pass-on-this-deal

  • Marco

    Yes, there are several restaurants I will frequent again because of Groupon. Although they are on the pricy end, I had a great dinning experience.

  • Jen

    2 comments, 1 question:
    - I use Groupon as a deal finder for businesses that I am already familiar with
    - I have found that sometimes a ‘deal’ on Groupon is not much of a deal – you can find the same or a better price by going directly to the seller. Have seen offers for tickets to events where you could actually purchase the same ticket cheaper by buying direct. 
    - Isn’t part of the business model the profit from ‘unused’ Groupons ? The seller might not be getting much new business, but certainly there is a percentage of Groupons that never get used, and the seller gets to pocket that money.

  • Tom Dixon

    Have stopped using Groupon and its competitors because found that the stress of dealing with their flood of emailed deal offers was not worth it, given so few, in fact none, ever taken up on! Think others probably feeling the same way and this could also lead to a reversal at some point!

  • Jessica

    I don’t use Groupon for restaurants after hearing about how much they can cost some businesses. I do however purchase Groupons for classes (be it a work out, dance or, even cooking), and if I like them I often do go back and become a full price customer. Mostly I use them for things I’m not sure I’d really like but would really like to try. I also purchase them occasionally for a night out (one time events). I have purchased a few Groupons for things I ended up not liking and did not use all the way up, which is nice because for the cost I don’t feel like I’m really wasting it if it doesn’t work out.

  • Richard Phillips

    I live out in the country so am unable to take advantage of a lot of the offers. However this past winter when purchasing a backup battery for my cell phone got ripped off by them. Signed up for the offer, got the email requesting credit card info and then another confirming the purchase. But then after three weeks when the item was not delivered spent another two weeks and 5 phone calls getting the refund to my credit card. So haven’t bothered checking the offers since.

  • Pete Drass

    Lets be honest!  Groupon and sites like it are for bottom feeders who don’t want to pay list prices for the service or product they use.  Paying full price shows how much you value the product or service.  I can’t stand Groupon or the bottom feeding discount shoppers that slap businesses in the face when they use a Groupon.  The businesses who use Groupon are merely desperate pawns in the game of retail and desperate for sales…I’d consider it a Hail Mary on their behalf.

  • Emily at eThreads.com

    I am a small business owner who used Groupon and several other sites like Groupon (KGB Deals, Mamapedia, College Budget, etc…) extensively last year.  We are an online retailer where we sell custom made handbags.  

    We signed up for about a dozen sites, each targeting a different market (moms, college kids, etc…) We were attracted by the possibility of reaching millions of new customers with each deal, and saw it as a great marketing opportunity.  What a disaster!  First, we sold a lot of coupons which flooded our business (at one point we were receiving over 100 orders a day.)  This sounds good, but many customers don’t realize we split the voucher amount with Groupon.  So, if you purchased a $25 voucher for $60 worth of goods, we split the voucher with Groupon – they get $12.50, we get $12.50.  So that means we get $12.50 to cover $60 worth of goods.  Since our business is very labor intensive, our margins are high and this deep discount nearly bankrupted us.  We were hoping the customers would spend more than their voucher, but 95% of them did not.  We also had a very high redemption rate – 9 out of 10 redeemed their vouchers.  (A lot of Groupon businesses make their money in unredeemed vouchers … I heard one company only had 3 of 10 people redeem their vouchers … not so in our case.) 

    It was our fault for signing up for so many Groupons, but we were thrilled with the exposure we were getting.  Thousands of new customers at our door, yes!  It was a great high.  But then the reality hit – we had thousands of new customers who were all costing money because of the deep discounts.  Not only were we losing money, but the surge in customers put a big strain on a customer relations department.  Because customer service is our #1 priority, this was particularly stressful.  

    Time will tell if these new customers will come back, but it was a very hard lesson for us to learn.  We stopped doing anything Groupon related and will no longer be participating in these type of voucher sites.  To continue our top notch customer service we’d much rather have 5 customers spending $100 than 50 customers spending $10.  

    Bottom line – Groupon could be good for businesses who may have lower margins and lots of repeat business (coffee shops, dry cleaners, etc…) or a big company that can eat short term losses and has the staff to handle the sudden surge in business.  It is not for our type of business that is small, relies heavily on labor, and demands specialized customer service.  In terms of whether their business model can last, I’m doubtful.  As more companies realize the real costs of doing business with Groupon, they may find less willing vendors.  If they take only a few dollars from each deal instead of splitting it 50/50 with the vendors, it could be a big help.  As I say, Groupon is great for customers and bad for business … go figure.  

  • http://www.discountqueens.com/ Printable Coupons

    If they will resolve their issues now, maybe they could save their once good reputation.

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Robin Young and Jeremy Hobson host Here & Now, a live two-hour production of NPR and WBUR Boston.

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